America's Debt Growth May Double Unexpectedly

By IBT Staff Reporter On 02/26/09 AT 10:41 PM

The U.S. debt held by the public may grow nearly twice as fast over the next two years than previously expected after President Barack Obama today unveiled his spending priorities to add trillions of dollars to the federal budget, including help for the financial industry and job generation through government programs.

Just last month, government calculations had estimated at 34.9 percent jump in the debt over the next two years. President Obama's plan will increase it by 63.9 percent.

Lawmakers must agree to the plan, but with a Democratic President and Democratically controlled Congress, there will still be significant increases.

The President explained today that the heavy expenses were necessary to help the economy rebound from recession and restore the financial system to stability.

We are now living with the fallout of this deep fiscal irresponsibility, Obama administration's federal budget blueprint stated, referring to the near doubling of the debt from 2001 to 2008 during the Bush administration.

The debt held by the public will grow 43.5 percent, or $2.56 trillion in 2009 to $8.36 trillion, according to President Obama's budget proposal, which was presented today in Washington. The debt will then rise another $1.15 trillion to $9.51 trillion in 2010.

Calculations from the Congressional Budget Office in January had estimated a 24.0 percent increase in the debt to $7.19 trillion in 2009 and a 34.9 percent increase in two years to $7.83 trillion.

Big Deficit Spending

The budget will mean the government will spend $1.75 trillion more this year than it takes in, the biggest federal deficit ever at 12.3 percent of the economy and the largest since World War II. The deficit is expected to fall to a still steep $1.17 trillion in 2010, the report states.

President Obama said this week that such expenses are unsustainable and that he will cut deficit spending to 3 percent by the end of his four year term, or $533 billion in 2013.

More for Financial Bailout

The budget for this year includes up to $750 billion in new spending for the financial bailout if necessary in addition to the $700 billion approved by Congress last year under President Bush. The budget has a $250 billion placeholder which would be used to buy assets from financial firms.

Last month, the Congressional Budget Office calculated that government loans and purchases tied to the financial industry under the $700 billion bailout program approved last year will eventually cost tax payers much less than that.

Initially, however, the government's purchases at troubled financial institutions would represent a $180 billion subsidy, the CBO said.

The measure is called the Troubled Assets Relief Program. It was passed in late 2008 when the Treasury Department sought to avert an economic meltdown in the wake of a severe credit crisis which led to the bankruptcy of once venerable Wall Street firm Lehman Brothers.

The program provided the government with an initial $350 billion to be used for purchases of financial assets. After the funds were distributed, lawmakers faulted the program for not providing enough transparency and accountability.

President Obama has vowed to rectify the problems which have been discovered. Earlier this week, his administration said it will release the funds to institutions which pass stress test that will check to see if the firms can survive if the economy declines more than expected. Financial firms will be required to follow stricter rules to get access to the next $350 billion.

Institutions will receive billions of dollars in subsidies for their assets. The CBO is counting subsidy costs as the prices the U.S. pays for assets minus their lower value now due to market uncertainty.

In addition, the Treasury was expected to have to borrow $460 billion more than this subsidy cost to cover the capital purchases, loans and other activities of the program this year.

The projections assume that the TARP will eventually disburse the full $700 billion that was specified in the legislation that created the program.